Midwest EMAD Chicago, IL Sam Young – EMAD Regional Director

EMAD’s Mission We cover the six states of HUD’s Region 5 – Illinois Indiana Michigan Minnesota Ohio Wisconsin We cover the entirety of every state, even the areas that aren’t “hot” at the moment. We also stay abreast of MF and SF markets.

Population Estimate (as of July 1) Population growth in the Midwest region remains slow and continues to be below the national rate.   Population Estimate (as of July 1) Percentage Change 2016 2017 2018 2016 to 2017 2017 to 2018 United States 323,071,342 325,147,121 327,167,434 0.6% Midwest Region 52,343,499 52,447,060 52,543,062 0.2% Illinois 12,826,895 12,786,196 12,741,080 -0.3% -0.4% Indiana 6,633,344 6,660,082 6,691,878 0.4% 0.5% Michigan 9,951,890 9,976,447 9,995,915 Minnesota 5,523,409 5,568,155 5,611,179 0.8% Ohio 11,635,003 11,664,129 11,689,442 0.3% Wisconsin 5,772,958 5,792,051 5,813,568 Source:U.S. Census Bureau Net natural change (resident births minus resident deaths) contributed to all the population growth because of net out-migration of 33,100 people; international net in-migration of 100,700 could not offset domestic net out-migration of 133,800. Five of the six Midwest region states grew during the last year, but only Minnesota, which added 43,000 people, growth of 0.8 percent, exceeded the national growth rate. Illinois was one of only nine states nationally to register population loss. With a loss of 0.4 percent or 45,100 people, Illinois recorded the second largest population decline and had a significantly larger decrease than the next-highest state total. Population declines in Cook County, the primary county in the Chicago metropolitan area, accounted for approximately 53 percent of the loss recorded in the state. Minnesota and Indiana had both domestic and international net in-migration, leading to the highest state-wide net in-migration in the region, with 17,500 and 12,800 people added, respectively. Nationally, there are 54 metropolitan areas with populations above 1 million, of which 8 are in the Midwest region. The Chicago and Cleveland metropolitan areas were the only metropolitan areas of the 8 to have recorded population declines, falling 0.2 and 0.1 percent, respectively. Three metropolitan areas in the Midwest region grew faster than the 0.6-percent national growth rate, led by Columbus, Ohio, which expanded 1.2 percent. Only 10 counties with populations above 1 million recorded declines, three of which were in the Midwest region. In Cook County, Illinois, Cuyahoga County, Ohio, and Wayne County, Michigan, the population fell 0.5, 0.4, and 0.1 percent, respectively. The loss of 24,000 people from Cook County was the largest decline of counties with populations above 1 million nationally.

Economic Conditions in the Midwest Region Declines in three sectors were more than offset by gains in all other sectors in the Midwest region during the first quarter of 2019.   First Quarter Year-Over-Year Change 2018 (thousands) 2019 (thousands) Absolute (thousands) Percent Total Nonfarm Payrolls 24,736.6 24,929.9 193.3 0.8 Goods-Producing Sectors 4,153.1 4,221.9 68.8 1.7 Mining, Logging, & Construction 933.6 965.8 32.2 3.4 Manufacturing 3,219.5 3,256.1 36.6 1.1 Service-Providing Sectors 20,583.5 20,708.0 124.5 0.6 Wholesale & Retail Trade 3,597.2 3,596.6 -0.6 0.0 Transportation & Utilities 1,043.9 1,072.6 28.7 2.7 Information 347.7 340.6 -7.1 -2.0 Financial Activities 1,388.1 1,401.0 12.9 0.9 Professional & Business Services 3,321.1 3,330.7 9.6 0.3 Education & Health Services 4,008.3 4,054.8 46.5 1.2 Leisure & Hospitality 2,356.0 2,383.5 27.5 Other Services 1,019.5 1,031.7 12.2 Government 3,501.8 3,496.5 -5.3 -0.2 The rate of growth slowed from 1.0 percent during the first quarter of 2018 and was the lowest first quarter increase since the economic recovery began during 2010. In addition, job growth in the Midwest region has fallen behind national job growth, which increased 1.8 percent during the past year. The fastest-growing sector during the past year was the mining, logging, and construction sector, which increased 3.4 percent, adding 32,200 jobs. More than 95 percent of the jobs added were in the construction subsector, spurred by a high level of residential construction activity (MF) during the past year. All six states in the Midwest region added jobs; the last time any Midwest-region state failed to gain payrolls year-over-year was the third quarter of 2010. From the first quarter of 2010 through the first quarter of 2019, the region has gained a cumulative total of 2.51 million jobs, representing growth of nearly 13 percent.

SF permitting – Why do MF developers care? Why do MF lenders care about SF permitting? If households are going to shift tenure to owners, there must be sufficient housing stock to buy. Of course, builders do not generally build starter homes, but move-up buyers purchase these homes, potentially freeing up housing stock. The number of single-family homes permitted fell in every state of the region, with the largest declines in Michigan and Illinois of 24 and 18 percent, to 1,550 and 1,400 homes. Nearly 90 percent of the decline in Michigan was concentrated in Detroit, where permitting fell by 32 percent, to 910 homes. Similarly, a 22 percent decline in the Chicago-Naperville-Elgin metropolitan area accounted for all the loss in Illinois. Condominium development is beginning to gradually resume in the region. In the downtown Chicago area, where condominium development averaged over 3,100 units annually from 2005 through 2009, the number of units delivered fell to an average of 160 annually from 2009 through 2014 but has recently increased to an average of 390 units delivered annually during 2015 through 2018.

Home sales – Why are sales declining? Home sales fell but average sales prices rose in large metropolitan areas throughout the Midwest region during the first quarter of 2019.   12 Months Ending Number of Homes Sold Price 2018 2019 Percent Average or Median 2018 ($) 2019 ($) Change Chicago-Naperville-Elgin (N&E) February 159,700 148,100 -7% AVG 272,000 276,500 2 Cincinnati (N&E) 47,600 45,550 -4% 182,100 192,700 6 Cleveland-Elyria (N&E) 41,700 41,600 0% 148,900 154,300 4 Columbus (N&E) 43,300 42,750 -1% 204,900 215,700 5 Detroit-Warren-Dearborn (N&E) 90,900 85,050 -6% 172,800 184,900 7 Indianapolis-Carmel-Anderson (N&E) 58,600 55,000 196,800 209,400 Milwaukee-Waukesha-West Allis (N&E) 26,700 25,900 -3% 215,200 217,400 1 Minneapolis-St. Paul-Bloomington (N&E) 73,500 72,400 277,200 292,300 AVG = average. N&E = new and existing. Sources: CoreLogic, Inc., with adjustments by analyst During the 12 months ending February 2019, the number of homes sold in the region fell 3.4 percent, following 1.3-percent growth a year earlier. Regular resales fell nearly 2 percent during the past 12 months and new home sales in the region fell more than 7-percent, in part, because new single-family home production declined during the past year. Single-family homebuilding in the region, as measured by the number of homes permitted, totaled 11,300, a 14 percent decline from a year earlier, compared with no change from the first quarter of 2017 to the first quarter of 2018. Is this decline a reaction to interest rates that hit 4.5 percent earlier this year? Or prices becoming unaffordable? I don’t have a good answer.

MF permitting remains healthy Despite overall slow population growth, the rental market is healthy. Absorption remains strong in most metro areas of the Midwest region. During the first quarter of 2019 (preliminary data)—   The number of multifamily units permitted in the Midwest region totaled approximately 9,075, more than 9 percent higher than the 8,275 units permitted a year earlier. Since a low of 2,175 multifamily units were permitted in the Midwest region during the first quarter of 2009, permitting increased an average of 15 percent annually through the first quarter of 2019. Increased multifamily permitting was reported in Michigan, Indiana, Illinois, and Minnesota, where permitting rose 49, 29, 21, and 20 percent to 800, 1,575, 1,750, and 2,850 units, respectively. These gains represent a reversal in Illinois and Indiana, where multifamily units permitted fell 44 and less than 1 percent, respectively, during the first quarter of 2018. Two states in the Midwest region reported decreased multifamily permitting: Ohio and Wisconsin, where permitting fell 9- and 37-percent, to 1,275 and 820 units, respectively. A decline in multifamily production in Ohio was concentrated in the Columbus metropolitan area, where permitting fell by 390 units. In Wisconsin, multifamily production in the Milwaukee-Waukesha-West Allis and Madison metropolitan areas decreased by 80 units each. Approximately 73 percent of all multifamily units permitted in the Midwest region were in the eight largest metropolitan areas; this figure was 68 percent during the first quarter of 2018 and 80 percent during the first quarter of 2017. By contrast, during the first quarters from 2012 through 2016, only 65 percent of all multifamily units permitted in the region were in the eight largest metropolitan areas.

Percentage Point Change Despite declining apartment vacancy rates in most large metropolitan areas in the Midwest region, market conditions remain mostly balanced.   Market Condition Vacancy Rate Average Monthly Rent 1Q 2018 % 1Q 2019 % Percentage Point Change 1Q 2018 $ 1Q 2019 $ Percent Change Chicago-Naperville-Elgin Balanced 5.8 5.3 -0.5 1,399 1,470 5 Cincinnati 4.2 -1.1 908 933 3 Cleveland-Elyria 5.5 4.5 -1.0 899 907 1 Columbus 4.3 0.0 902 947 Detroit-Warren-Dearborn 4.0 3.7 -0.3 932 960 Indianapolis-Carmel-Anderson 6.3 6.0 842 881 Milwaukee-Waukesha-West Allis Slightly tight 4.4 3.2 -1.2 1,072 1,113 4 Minneapolis-St. Paul-Bloomington 2.8 3.0 0.2 1,231 1,294 Although new apartment construction remains elevated, vacancy rates fell in 6 of the 8 metropolitan areas discussed in this report. Average monthly rents rose in all eight areas, and the rate of increase in 4 of the areas was greater than the national average rent increase of 4.5 percent (RealPage, Inc.). Apartment construction activity continues to be high, as an estimated 45,300 new units are currently under construction in the eight metropolitan areas discussed in this report compared with 27,450 units that were delivered during the past year. The largest decreases in apartment vacancy rates were in the Milwaukee-Waukesha-West Allis, Cincinnati, and Cleveland-Elyria metropolitan areas, where rates decreased to 3.2 percent, 4.2 percent, and 4.5 percent, respectively. In the Chicago-Naperville-Elgin metropolitan area, where the apartment vacancy rate declined to 5.3 percent, nearly 9,825 new apartments entered the market during 2018, and 15,600 more units are under construction. In downtown Chicago, within the two Realpage, Inc.-defined areas of The Loop and Streeterville/River North, vacancy rates were 7.1 and 6.6 percent, up from 6.9 and 6.3 percent a year earlier, respectively. In these two market areas, 4,550 new units entered the market during 2018 and 6,900 more were under construction (RealPage, Inc.). Smaller vacancy rate decreases of 0.3 percentage point each were reported in the Detroit-Warren-Dearborn and Indianapolis-Carmel-Anderson metropolitan areas. The lowest current average vacancy rate, but the only area in this report with an increase in vacancy rate, was the Minneapolis-St. Paul-Bloomington metropolitan area. The rate rose 0.2 percentage point, to 3.0 percent; the first increase in first quarter vacancy rates since 2016 (RealPage, Inc.). Average apartment rents rose in all eight large metropolitan areas in the Midwest region discussed in this report. Increases ranged from 1 percent in the Cleveland-Elyria metropolitan area to $907, the second-lowest average asking rent among large metropolitan areas in the Midwest region, to 5 percent in the Chicago-Naperville-Elgin, Minneapolis-St. Paul-Bloomington, Columbus, and the Indianapolis-Carmel-Anderson area, where the rents rose to $1,470, $1,294, $947, and $881, respectively. A 4 percent increase was recorded in the Milwaukee-Waukesha-West Allis area, where rent averaged $1,113, followed by increases of 3 percent each in the Detroit-Warren-Dearborn and Cincinnati areas, where the average rents rose to $960, and $933, respectively.

Renter demographic data (2016-current) Renter households are skewing older – millennial households delaying homebuying so staying renters longer (or not buying at all), and boomers entering the rental market. These trends will drive demand for rental housing, but will affect what product is demanded. Are builders meeting the needs of this rental demographic? Amenity arms race Renter households are skewing older – millennial households delaying homebuying so staying renters longer (or not buying at all), and boomers entering the rental market. These trends will drive demand for rental housing, but will affect what product is demanded. Are builders meeting the needs of this rental demographic? Amenity arms race, etc.